The Democratic defeat in yesterday’s Massachusetts Senate race puts a punctuation mark on the grinding erosion of support for the Obama Administration and its economic policy in a tough first year. Clearly voters were sending the Administration a message that America is on the wrong course with Obama’s poll numbers slipping below 50% by December and Democratic defeats in both of the major state elections in which Obama campaigned in November (Gubernatorial races in Virginia and New Jersey).
But, I don’t think the President gets it. He is holed up in the echo chamber called the White House. If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.
With this in mind, I want to grade the President’s economic policy performance on his first year anniversary, putting Obama’s economic agenda and inheritance in historical terms. I will try to make this as comprehensive as a blog format allows. At the end, I will make some remarks about what to expect going forward.
If I were a university professor grading the Obama Administration’s economic policy, I would give it an incomplete – but with a warning that the final grade was unlikely to be good given what I have seen so far. Barack Obama has been in office for only one year; so, clearly he has a long way to go before we can make a definitive assessment of his economic policy.
Similarities: Reagan and Clinton
When I look at the polling data, two recent Presidents come to mind, particularly because of the economy: Ronald Reagan and Bill Clinton. Reagan entered office during a deep recession, at the tail end of what might be termed an inflationary depression due to secular issues involving fiat currencies, inflation, interest rates, equity market losses, currency depreciation, globalization of the money markets, and de-industrialization in the United States. And to top it off, Reagan suffered another deep recession right after he came to office. For the United States, the 1970s were a catastrophe economically.
The polling data for Obama and Reagan are very similar. The December chart below from Pollster.com demonstrates this.
So, clearly the economy has a lot to do with Obama’s falling poll numbers.
I also look at the early days of the Clinton Administration as a comparison. Clinton was a centrist, triangulating New Democrat who entered office during a period of lingering joblessness which engendered the term jobless recovery. Obama’s situation is similar given the rising unemployment rate today and the job losses despite a broad-based economic pickup (Goldman Sachs is estimating 5.8% GDP growth for Q4 2009). The centrality of healthcare reform in the President’s domestic agenda – and its potential failure and the resulting mid-term election losses for Democrats in Congress – makes this comparison even more apt.
However, there are critical differences which I will highlight after making another comparison.
The Roosevelt comparison
Given some of his statements in the past, I suspect the President sees these similarities to Clinton and Reagan. But, it is the comparison to Roosevelt which Obama and his people played up the most during the election campaign and the period just after it.
The media parroted this theme endlessly. As Time put it in the story accompanying the Obama as Roosevelt photo to the right:
Even in the calmest of times, the transfer of presidential power is a tricky maneuver, especially when it involves one party ceding the office to another. But not since Franklin D. Roosevelt took office in the midst of the Depression has a new President faced a set of challenges quite as formidable as those that await Obama. That’s why Obama has been quicker off the blocks in setting up his government than any of his recent predecessors were, particularly Bill Clinton, who did not announce a single major appointment until mid-December. As the President-elect put it in his first radio address, "We don’t have a moment to lose."
Obama is not Roosevelt
But Barack Obama is not Franklin Roosevelt – far from it. He enters office at a point much nearer the beginning of a cyclical downturn as did Clinton and Reagan. His people fail to realize that Obama is more Herbert Hoover than he is Franklin Roosevelt.
What historical period should Obama be looking to then? Clearly, he should be looking to Hoover. And I believe this is very important with the G-20 right around the corner. Any number of pundits from Simon Johnson to Wolfgang Munchau will tell you the G-20 summit will be a big failure. While the Americans are trying to reflate the bubble and bring back the same unbalanced system which got us here, the Europeans are putting their heads in the sand, wishing all of this would go away.
And that’s not a good thing at all. If one thinks back to Hoover again, after a long period of globalization, an interconnected world meant problems in one country quickly became manifest elsewhere. The world’s major nations failed to come together and build a common solution. Some thought themselves immune. But, when the depths of Depression finally came, it was little Austria which ushered it in. And soon, depression was everywhere.
This was 1931. Herbert Hoover was president, not Franklin Roosevelt.
-Barack Obama as Herbert Hoover, Apr 2009
Obama’s failure to understand where we are in the economic cycle and the relationship to historical precedent has been catastrophic to the conduct of economic policy and critical in his missteps. There is more to Obama’s misfortune than a bad economy (see Nate Silver’s take on the Massachusetts special election).
Reliving the Clinton days via Reagan’s silver tongue, Kennedy’s Camelot, and Roosevelt’s New Deal
I feel like the Obama Administration is stuck in the past. They talk about the transformative presidencies of Ronald Reagan or Franklin Roosevelt. The magic Camelot feel of JFK’s time in the White House. But, above all, stands the “Don’t Stop Believin’” retour of the Clinton era. These comparisons to past presidents are blinding the Obama Administration to the realities on the ground (see here and here).
The huge number of Clinton-era re-treads in the Obama Administration should tell you that. And the quote from Time Magazine shows you that lessons learned during the early Clinton days was very much on these policy makers’ minds. The policy agenda (think healthcare and deficit reduction in particular) makes them think that 2008 was a repeat 1992. It was not.
Now, looking back, if one hearkens back to 1992 and the election that took Bill Clinton to the White House, ‘it’s the Economy, stupid’ was the phrase that symbolized Clinton’s victory and George H. W. Bush’s defeat. Today, as we are mired in a deep economic downturn, we should be tempted to bring back that phrase.
But, 2008 was not 1992. This is no garden variety downturn. It is something altogether different. We are not witness to a case of over-production and overheating as is usually the case. It is a case of over-leverage and over-indebtedness. As a result, the key to the outlook for the American economy is fairly simple and it hinges on a single word: credit.
-It’s the writedowns, stupid, Mar 2009
We are in depression, not recession, because the secular trend is of the three D’s: deleveraging and debt deflation leading to depression. Harkening back to the same old policies of 1992 is not just wrong, it is catastrophically so. It made Obama promise 8% unemployment instead of the 10.0-10.5% that we have received. As I said after the defeats in Virginia and New Jersey called Obama’s economic policy into question:
Well, if you’re the President, you have to under-promise and over-deliver. President Obama has been doing exactly the opposite. Of course people are going to be angry when you promise 8.0% unemployment and instead we get 10.2%. Right now, Obama should be talking about 13% unemployment.
-Unemployment rate illusion, November 2009
I would be remiss if I didn’t remind you that all of this was predictable from the word go. A cautious politician would have understood the under-promise/over-deliver tactic and implemented a much larger and better-crafted stimulus package as I suggested last January. And he would have understood the coming implosion in state and local governments’ budgets (as I also pointed out as far back as March 2008 and again as the stimulus package was coming due). A cautious politician would, therefore, have sensed the enormity of the problem and taken precautionary action.
The Triangulating Neo-liberal Con
But, Obama is yet another centrist, triangulating New Democrat in the Bill Clinton mold. Don’t be bamboozled by republican propagandists telling you Obama is running left or that he is a ‘socialist.’ This is nonsense – kabuki theater, if you will. They are merely using Obama’s weakness to gain control of the historical political narrative. In reality, Leftists are absolutely outraged at his legislative agenda.
Obama is a corporatist like other New Democrats of the neo-liberal mold. The schtick – as also used by Schroeder in Germany, Koizumi in Japan and Tony Blair in the UK – is to say the things that progressives want to hear, but do the things that big business wants to be done. You have to give a sop to the base here and there like exempting unions from the healthcare bill’s Cadillac policy tax. But, the goal is to curry favor with big business, which is the paymaster of both established parties in the U.S.
In the 1990s, the so-called Third Way, popularized by Bill Clinton and Tony Blair, changed the fortunes of liberals dramatically. Traditionally, the Democratic and Labour Parties were controlled by unions and working class interests – the so-called left wing. This is one reason Democrats controlled the South until the civil rights movement. But, stagflation seemed to discredit leftish policies. In the U.S., the 1980s ushered in 12 years of Republican Presidency. Labour’s trip into exile was even longer, 18 years.
The Republicans were stopped only as a result of an unusual combination of Ross Perot’s third-party candidacy and Bill Clinton’s co-opting of large parts of the right’s pro-business anti-regulation, pro-free market platform – so-called Neo-Liberalism. The neo-liberals in America were so successful that Tony Blair adopted the same tactics in creating New Labour and overthrowing the Conservatives in 1997. Junchiro Koizumi copied Blair in moving the LDP away from its base toward neoliberalism, vaulting him into power in 2001. In fact, one could even see Gerhard Schroeder as a neo-liberal who moved Germany’s SPD into power in 1998 – one reason the SPD is now losing voters to Oskar Lafontaine and die Linke (The Left).
So, Marshall is right. Obama has been more interested in sending out a pro-business signal to re-assure business interests and to court independent voters. I believe he has made a political calculation that he can hold his base of support even if he adopts a more center-left positioning because they have nowhere else to go. It’s not like they are going to vote for the Republicans. This has been an effective way to power for left-leaning mainstream parties for at least 15 years.
-Obama and the Fat Cat bankers, Dec 2009
Read the post above in its entirety because it highlights many of the political issues we are now seeing and why Obama’s newfound populism rings hollow.
The political capital lost in bailouts
But, the real killer for Obama has been his dependence on Summers and Geithner which I liken to George W. Bush’s dependence on Rumsfeld and Cheney. For his part, Geithner, now ensconced in a huge scandal over the cover-up at AIG, says:
The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.
And indeed they have been willing to go against the will of the people. But, Obama mis-underestimated the outrage these policies would cause. It’s the bailouts and the crony capitalism and looting they brought into public view that people object to most – not healthcare, not the wars in Iraq and Afghanistan, not the Christmas Day airline failure. Think about the public mood and the joy of election day one year ago at electing the first Black president in American history:
President Barack Obama was elected last year in a sizable victory over his Republican competitor. Bolstering his position was the huge Democratic majority in both houses of Congress. Given these advantages, combined with intelligence and his natural talent as an orator, the President could pretty much chart his own course.
He did so, immediately turning to the weak economy and the battered financial sector first. In his first days in office, Obama pushed through a sizable stimulus package, bailed out numerous financial institutions, and put into place a host of measures to prop up the banking industry at considerable cost to taxpayers.
The plan worked. The financial industry has roared back to life with huge profits and large bonuses all around as a result of the government’s largesse – well at least for most of the largest companies. The surviving large financial institutions are even larger and more dominant than before the crisis. Now, it is business as usual again on Wall Street. In this sense, Obama and his economic team have been very successful.
But at what cost?
People are angry about this juxtaposition.
What’s likely to happen now
And of course, it is bonus season right now. So, the bonuses are a reminder that the recent populist rhetoric and the too-big-to-fail bank tax is a political stunt and nothing more. There has been absolutely zero attempt at making transformative amendments to the financial system and its regulation because the political process is broken. The emphasis on deficit reduction means a double dip recession is a distinct likelihood. On both these issues, Obama’s centrist instincts make him an unlikely Roosevelt – either FDR New Dealer of Teddy Trustbuster (see FDR’s inaugural address for why). It also makes him an unlikely Reagan, who fought off a Democratic Congress and a deep recession to push through his agenda.
In all likelihood, we will not get any real reform and, as Jamie Dimon recently said – and Stephen Colbert ridiculed – financial crisis is “something that happens every five to seven years.” So, I see another crisis as likely – and given the fragility of the economic environment, this crisis will be a killer economically (and politically for Obama).
I fleshed out these themes in three 2009 retrospectives and my comprehensive post on recession and depression:
- The year in review at Credit Writedowns – Crony Capitalism
- The year in review at Credit Writedowns – Kleptocracy
- The year in review at Credit Writedowns: Crisis Solutions
- The recession is over but the depression has just begun
If one wants an economic parallel for secular bear markets and depression, 1931 (Hoover) or 1938 (Roosevelt II) and 1974 (Ford) are more akin to 2010 than are 1934 (Roosevelt I) or 1982 (Reagan). From a Japanese perspective, think 1997 (see articles here, here and here).
From Obama’s perspective, the loss in Massachusetts puts the nail in the coffin for health care. His linchpin domestic agenda item is bust and he must start anew. Meanwhile, there is huge populist outrage and an improving but weak and unsustainable recovery in the works. Overall, Obama’s first year has been dismal.
I believe Obama is a triangulating New Democrat. His kneejerk reaction, therefore, is to look back to 1994 and draw the same conclusions Bill Clinton did when his own healthcare agenda collapsed. And all of the Clintonites surrounding him in the White House bubble are no doubt convincing him to do this. But 2010 is not 1994. Barack Obama would be well-advised to understand this.